Managing inequality without transforming it: structural limits of social policies and their weak contribution to sustainable development in Latin America

Introduction

In this article, I will refer to social policies  in Latin America as one of the three dimensions of sustainable development policies. The purpose is to see if these policies are prepared to contribute to sustainable development, especially to its economic dimension. To reiterate a widely held concept, a non-inclusive or highly unequal society cannot mobilise the resources and consensus needed to address environmental challenges and ensure lasting economic prosperity. In this sense, the social dimension is intrinsic to development, functioning both as a pillar and an enabling condition for social welfare.

However, despite the validity of this argument, the social usually occupies a secondary and subordinate place to the economic. This responds, perhaps, to the implicit validity of the trickle-down theory, which assumes that economic growth automatically generates improvements in employment and social welfare. Although this premise contains a part of truth, it ignores the fact that this impact does not occur simultaneously or uniformly; On the contrary, the benefits of growth tend to be concentrated in those sectors that have the greatest accumulated or inherited advantages.

While it is imperative to recall the deep asymmetries among the countries of the region—which often generalize arbitrary—for this analysis it is necessary to focus on their common features. To identify them, any researcher or public policy manager today has abundant high-quality information, periodically disseminated by international organisations.

In this framework, I formulated a series of questions on seven thematic axes related to the situation and social policies in the region. These questions were processed by three artificial intelligence platforms (NotebookLM, Gemini and ChatGPT) from a selected corpus of 12 documents from ECLAC, OECD, ILO, UNDP, IDB and the World Bank. Although it was explicitly requested to avoid complacent answers that could sweeten reality, in several cases it was necessary to carry out a second interrogation to obtain greater rigor. Although this exercise still requires exhaustive human supervision to ensure full confidence in its results, I have decided to use these findings for this article, assuming that, although there may be minor inaccuracies, the general conclusions remain valid. The topics around which I have formulated the questions are the following:

1. Priorities for social policies in the twenty-first century and public expenditure on non-contributory social protection. Comparison of expenditure on health, education and social protection with OECD/Europe.

2. Reduction of poverty and multidimensional poverty in the last 10 years.

3. Evolution of inequality in the last 10 years. 

4. Groups most affected by poverty and inequality 

5. Main causes of inequalities. 

6. Impact of social policies on the reduction of poverty and multidimensional poverty and on the evolution of inequality.

7. Articulation of social policies with policies for development and economic growth.

The sources consulted from the different organisations are the following (all available on the website): 

• ECLAC: Social Panorama of Latin America and the Caribbean 2025; Economic Survey of Latin America and the Caribbean 2025; The trap of high inequality and low social mobility in Latin America and the Caribbean; Preliminary Overview of the Economies of Latin America and the Caribbean 2025.

• OECD: Latin American Economic Outlook 2025: Promoting and Financing Productive Transformation; Expand social protection to combat informality.

• World Bank: (In)Formalizing Jobs in Latin America and the Caribbean 2025; Latin America and the Caribbean Labour Overview 2025; Trends in poverty and inequality in Latin America and the Caribbean 2025.

• IDB: Labour Market in Latin America and the Caribbean 2023.

• ILO: Latin America and the Caribbean Labour Overview 2025.

• UNDP Regional Human Development Report 2025.

After obtaining and contrasting the answers, I prepared this text whose central thesis proposes that, throughout the first twenty-five years of the twenty-first century, Latin America has manifested a persistent paradox: the unprecedented expansion of social policies has not managed to deactivate the structures that generate inequality, as it lacks a comprehensive framework of policies that substantially reduce them. The region continues to be one of the most unequal in the world and faces increasing difficulties in sustaining social progress in contexts of low growth, fiscal crises, and recurrent external shocks. Although social protection programmes have been implemented on a massive scale—mainly cash transfers—and access to education and health has been expanded, these achievements have operated more as containment mechanisms than as engines of structural transformation. To account for these limitations, the hypothesis proposed suggests that social policy in the region has worked in a fragmented and reactive way, managing poverty without altering the development model that produces it.

 

2. Recent developments in poverty and inequality in Latin America

In the last decade, poverty reduction in Latin America has shown critical fragility. Following significant progress driven by the commodity boom that ended in 2014, the region faced a marked economic slowdown, compounded by the devastating impact of the 2020 pandemic. This shock produced an abrupt setback whose subsequent recovery has been fragmented: although regional monetary poverty fell to 25.5% in 2024 – its lowest historical level – this progress is mainly explained by the performance of Brazil and Mexico. It is, therefore, a geographically concentrated and vulnerable advance. Extreme poverty, moreover, continues to exceed the levels of ten years ago.

On the other hand, multidimensional poverty shows a more sustained trend, with a drop from 34.4% in 2014 to 20.9% in 2024. However, this improvement is largely attributed to the expansion of access to digital services; In contrast, shortcomings in employment and social security persist as the main obstacle, representing almost 30% of the index. The labour market is thus consolidated as the main generator of structural exclusion.

This dynamic translates into low social mobility: between 58% and 76% of poor households remain in this condition from one year to the next. In addition, 31% of the population is in a situation of 'stagnant vulnerability'; a segment that, although not technically poor, lacks the necessary assets to withstand external shocks without falling into precariousness.

Finally, these chiaroscuros coexist with a persistent concentration of wealth. Inequality, measured by the Gini coefficient, shows a rigid stagnation: while household surveys suggest a slight improvement (from 0.46 to 0.45), tax records – more accurate in capturing high incomes – reveal an immovable index of 0.64-0.65. The richest decile continues to concentrate up to 50% of total income, evidencing a structural gap that social policies have not yet been able to close.

The groups most affected by poverty and inequality are 

• Children and adolescents: the incidence of poverty in minors reaches 38.3%, almost three times higher than in older adults. This not only implies current deprivation, but also consolidates the intergenerational transmission of poverty

• Informal workers and the "excluded segment": about 50% of the workforce is informal and 8 out of 10 poor workers are informal.  Within the informal sector, the segment of people who are not extremely poor, but lack social protection, pensions and health insurance, stands out. This group lives in high vulnerability and accounts for almost a third of multidimensional poverty, especially in the dimension of employment and pensions. 

• Women (especially low-income women), who face structural inequalities linked to the sexual division of labour: they bear a disproportionate burden of unpaid care work (equivalent to about 21% of regional GDP), which limits their labour participation, income and access to social protection. Poverty therefore has a clear gender bias: for every 100 poor men there are 123 women in the same situation. 

• Rural, indigenous and Afro-descendant populations, who have higher levels of multidimensional poverty due to territorial gaps, less access to services. Inequality is not only in income, but also in opportunities and effective rights. 

• People with disabilities, who face accessibility barriers and prejudices that limit their inclusion in the labour market. Women with disabilities have labour participation rates of less than 30% and are often overrepresented in the lowest income quintiles.

• Migrants, especially children and adolescents, who face high rates of educational exclusion. In addition, their labour insertion is usually more precarious and informal.

The overlapping of vulnerabilities (e.g., female, indigenous, and rural) creates an intersectionality of inequalities that, according to sources, traps these groups in the most precarious part of the distribution of well-being.

 

3. Causes of inequality

Inequalities in Latin America reflect persistent structural causes, not short-term failures. The productive structure fails to generate quality employment and more than 50% of employment is informal, concentrated in sectors of very low productivity (agriculture, commerce, personal services), while the highly productive sectors create little employment. This produces huge wage gaps: in several countries, formal workers earn 2 to 3 times more than informal workers. Poor job quality accounts for 29.2 per cent of regional multidimensional poverty. Inequality originates in the productive sphere and policies fail to reverse it.

The regressive tax structure reinforces these gaps. The regional tax burden is around 21–22% of GDP, compared to 34% in the OECD, and relies heavily on indirect taxes such as VAT. ECLAC estimates that tax evasion is equivalent to 6–7% of GDP, which limits the redistributive capacity of the State. As a result, taxes and transfers reduce the Gini index very little compared to Europe.

The segmentation of social protection systems is another key factor. Access to pensions, health and insurance depends on formal employment, which excludes half of the workforce. In 2022, only 47.9% of the economically active population contributed to pensions. Inequality is not compensated: it is reproduced throughout the life cycle.

Educational inequality is not one of access but of quality. Although coverage has increased, educational returns are very unequal and depend on social origin. Education no longer guarantees mobility: there is a devaluation of educational credentials where young people from vulnerable sectors, even with completed secondary school, remain trapped in job insecurity.

Finally, gender, territorial and ethnic inequality, together with urban segregation, amplifies all of the above. Women spend three times as much time on unpaid work; rural areas and marginal neighbourhoods concentrate multidimensional poverty. As for inequality between men and women, the sexual division of labour and the current social organisation of care limit women's autonomy and condition their educational and work trajectories from an early age.

In short, inequality in Latin America appears as a systemic product of mutually reinforcing productive, fiscal, and social models. It is also worth mentioning the limited technical, operational and political capacities of the institutions that hinder the implementation of more effective policies.

 

4. Impact and limitations of social policies in reducing gaps

The impact of social policies on the evolution of inequality in Latin America during the twenty-first century has been palliative but structurally insufficient.

4.1 Social protection

The expansion of non-contributory social protection has been the main instrument for cushioning the effects of extreme poverty. Cash transfer programmes and social pensions avoided deeper falls, as was evident during the pandemic. However, these interventions have been structured on dual systems: schemes that provide security and robust protection to formal work, while offering minimal and fragmented assistance to informal workers. In this scenario, the so-called "excluded segment" – non-poor informal workers – remains without effective coverage, which blocks their social mobility and reinforces the trap of informality.

4.2 Education

The focus of education policy has been on mass coverage and although basic schooling has been almost universalised, a "learning crisis" persists. The region today faces an acute "learning crisis". The quality gap between the public and private systems acts as a dam that blocks social mobility: economic returns from education have declined and socioeconomic background remains the main predictor of outcomes. Thus, education has lost its historical capacity as an engine of equity and development.

4.3 Health

Health policies have helped reduce certain multidimensional deprivations—basic access, primary care—but their impact on poverty has been modest. Despite advances in nominal coverage, the systems remain deeply segmented (public, private, and contributory), with critical inequalities in financing and quality. This segmentation generates perverse incentives: in some contexts, the similarity between subsidised and contributory services discourages formalisation. Likewise, the high out-of-pocket expenditure on complex care continues to push vulnerable households into poverty in the face of any epidemiological shock. The pandemic showed that sustained investment was insufficient, relegating health to a residual expense and not a pillar of development.

4.4 Employment

Labour segmentation confines 50% of workers (with peaks of 70% in countries such as Peru) to sectors of low productivity and informality, without social rights or savings capacity. In short, employment continues to operate as a variable dependent on the business cycle and not as the result of a deliberate development strategy.

Active employment policies are marginal and have not managed to close productivity gaps or reduce structural informality. Although labour income accounts for two-thirds of the historical reduction in poverty, high non-wage costs and regulatory rigidity, among other factors, prevent high-quality job creation. 

One fact reveals the magnitude of the challenge: while OECD countries allocate on average between 1.5% and 2% of their GDP to labour market policies (unemployment insurance, training and intermediation), Latin America invests less than 0.5%, and in many cases below 0.3%. While unemployment insurance and active policies predominate in Europe, in the region these instruments cover a minority, leaving most of the workforce at the mercy of precariousness.

 

5. Disconnection between social policies and development strategy

Despite contemporary rhetoric about "articulation," in practice both spheres have operated in parallel, with links that are more discursive than effective. Especially since the 2010s, institutional discourse affirms that social protection, education and health constitute "investments in human capital" and pillars of development. However, evidence indicates that social protection policies have been designed primarily as palliative mechanisms; Its objective is to mitigate the effects of low growth, informality and inequality, instead of transforming them as well.  Non-contributory systems expanded to cover those excluded by the labour market, but they lacked a simultaneous and sustained strategy to raise their incomes. On the other hand, education and health have tried to guarantee basic rights, employment policies and training – more linked to market dynamics by definition – have not managed to reduce informality or raise labour productivity. The latter, between 1991 and 2024, grew by just 0.9% per year, a figure that is well below the already modest 1.2% recorded in OECD countries. 

In short, social goals and productive and fiscal policies do not go hand in hand. This disconnection is also expressed in a governance of government policies in which the social is subordinated to the short-term fiscal logic. While the Ministries of Finance prioritise expenditure control and macroeconomic stability, the Social Development portfolios tend to concentrate on the management of poverty containment, and the other portfolios of the social sector advance in a partial and sectoral manner, without articulating themselves in a systemic way or at scale with productive development policies. Each ministry acts according to its logic, and it is difficult to govern the whole.

 

6. Political economy of persistent inequality

Fiscal space for social reforms is under siege by high public debt service and weak redistributive pacts. Revenue is overly dependent on indirect consumption taxes (VAT) rather than direct income taxes. In addition, tax evasion reaches between 6% and 7% of regional GDP, drastically limiting the redistributive capacity and investment of the State. The persistence of inequality, however, is not only due to fiscal restrictions, but is part of a scenario marked by the resistance of power groups, institutional fragmentation and the absence of explicit redistributive conflict. Social policies are politically acceptable because they do not alter the structure of income or economic power. They reduce social tensions without transforming the causes that generate them.

A comparison with international standards reveals a critical financial lag. Regarding social spending, while Latin America allocates an average of 11.4% to 11.6% of its GDP to social spending, OECD countries invest between 20% and 31%. In employment, the gap is abysmal: the region spends less than 0.5% of GDP on productive development and employment, while the OECD allocates 3%. Finally, in health, public spending averages between 2.7% and 3.1% of GDP, compared to 6.3% in the OECD, which generates high out-of-pocket expenditures that impoverish households. Finally, 3.8% of GDP is spent on education, compared to an average of 4.8% - 5% in OECD countries.

In conclusion, social policies expanded without comprehensively redefining the welfare model or its link to economic development. While in Europe non-contributory social protection tends to be part of an integrated and universal system, in Latin America it works more in a welfare-oriented manner.

 

7. Conclusions

Latin America and the Caribbean are going through a period of structural stagnation that international organisations have called a "lost second decade." With an average regional economic growth of just 1.2% between 2016 and 2025, the region faces a productivity crisis and social rigidity that compromises the well-being of present and future generations. In this context, overcoming the "high inequality trap" is not only an ethical goal, but an imperative for democratic stability and sustained economic growth.

Among the organisations consulted, there is an evident convergence of visions that allows us to affirm that social policies in Latin America have functioned as a network to compensate and mitigate, but they have not been instrumented to promote sustainable and inclusive development. They have managed inequality better than they have reduced it. There are no contradictions between these bodies, only different emphases. The balance is ambivalent: real progress, but structural political limits.
Among the advances, the following four are recognised:

Reduction of poverty (especially extreme): as I pointed out, social policies function as a safety net.

• Expansion of non-contributory social protection, basically cash transfers, social pensions and basic access to services. In education, the main advance was massification (especially in primary and secondary expansion). In health, progress was made towards the idea of universal coverage.

• Progress in labour and gender inclusion, i.e., increased female labour participation in several countries, better real minimum wages in some contexts, recovery of employment after the pandemic (especially informal) and integration of care into the political agenda. There are regulatory and access advances, not structural equality.

• Greater recognition of structural inequalities and better social information (records, surveys, multidimensional measurement). The diagnosis is clear and shared. On a more narrative level, recently the social policy agenda has incorporated adaptive social protection, climate shocks and the care economy as a strategic sector (not only as a "social" issue, but also as an economic one). Some countries have started to develop programmes in these areas.

These advances are important as well as insufficient to overcome structural gaps. Reducing monetary poverty does not guarantee sustainable development, if resilience is not built. The lack of assets in households and the precariousness of safety nets allow any external shocks to threaten decades of progress. Added to this, there is a risk of political stagnation if the expectations of social mobility of the vulnerable middle classes are frustrated.

Based on the joint analysis of the sources of ECLAC, the World Bank, the OECD, ILO, IDB and UNDP, there is a common core of priority strategies to overcome inequality and contribute to development in Latin America, although with different emphases. These strategies are:

1. Productive transformation with quality employment (ECLAC, IDB, OECD, ILO)

Inequality is born in the productive structure. They all agree that it is essential to reduce productive heterogeneity, increase productivity and create formal employment. Without structural change, social policies only compensate. The ILO emphasises decent work; ECLAC and IDB, diversification and productive sophistication; the OECD, linkages and competitiveness. The diagnosis is clear: growth without transformation reproduces inequality.

2. Universal and integrated social protection systems (ECLAC, UNDP, ILO)

The priority is to move from fragmented schemes to universal social protection, even decoupling it from formal employment. The focus can no longer be on poverty, but on income security throughout the life cycle. Without this, social mobility is unviable. The recognized limit is the high fiscal cost and the weak redistributive pact.

3. Progressive tax reform (ECLAC, OECD, IDB)

Everyone agrees that without more and better taxes there is no sustainable equality. Hence, it is proposed to reduce dependence on indirect taxes, combat evasion (6–7% of GDP) and strengthen direct taxes. The implicit caveat is that political viability is the biggest obstacle.

4. Education and training linked to development (ECLAC, OECD, World Bank)

Coverage is not enough: quality, productive relevance and effective learning are required. Education must be aligned with development strategies; otherwise, it reproduces inequality.

5. Gender and territorial equality as a condition, not a complement (ECLAC, UNDP)

Reducing inequality requires addressing care, gender gaps, and territorial segregation. Not doing so limits growth and cohesion.

In conclusion, inequality can only be overcome by integrating social, productive and fiscal policies.  We must bet on a model of public policies that, on the one hand, conceptualises them from the dual perspective of rights and investment in development and, on the other, integrates the social, the productive and the fiscal. 

Although, as I have already stated, there are countries that have exhibited outstanding social and economic results over the last few decades, such as Brazil, Chile, Uruguay and Costa Rica, when considering the region as a whole, the problem is not the diagnosis, but the political economy. The region knows what to do, the obstacle has been the impossibility of breaking down barriers due to the lack of deep political pacts. There is no lack of social policies or diagnostics, great agreements are needed to redistribute power, income and opportunities.

 

The opinions expressed in this blog are solely those of the authors and do not necessarily reflect the position of the EU-LAC Foundation.